Dollar weak on expectations of no 2019 Fed hikes; Aussie slips

SINGAPORE: The dollar weakened versus major peers such as the euro and yen on Thursday due to growing expectations the Federal Reserve will pause its rate tightening cycle this year.

Minutes from the Fed’s Dec. 18-19 meeting revealed that several policymakers were in favour of the US central bank keeping rates steady this year.

Broader market sentiment turned slightly cautious in Asian trade as markets waited for concrete evidence that progress is being made in US-China trade talks.

MSCI’s broadest index of Asia-Pacific shares outside Japan was lower by 0.6 per cent, while riskier currencies such as the Australian dollar fell by 0.15 per cent to $0.7155. US equity futures also turned lower, falling 0.5 per cent.

The yen gained 0.2 per cent to 107.90. “The China-US trade talks are just a first step towards easing tensions on both sides,” DBS analysts Eugene Leow and Neel Gopalakrishnan said in a note.

“While there was agreement on less thorny issues such as agriculture and energy, US demands for verification and enforceable targets on intellectual-property rights, transfer of technologies and non-tariff barriers may not be that easily addressed,” the note said.

They expect room for volatility in the lead up to the March 1 deadline where negotiations on these issues need to be concluded.

But most traders still expect market sentiment to remain positive in the medium term on expectations the Fed will not raise rates in 2019 as well as a potential trade deal in coming months between the world’s two largest economies.

“The Fed has acknowledged market concerns with its language. The markets are clearly reading into this as a more accommodative stance,” said Michael McCarthy, chief markets strategist at CMC Markets in Sydney.

“Optimism on US-China trade talks is also bolstering risk sentiment… the sharp rally in oil prices is also indicative of the fact that global growth fears were probably overdone,” added McCarthy.

Commodity currencies such as the Canadian dollar have been the biggest beneficiaries of improving risk sentiment this week. The loonie fetched C$1.3230, hovering close to its highest level in more than a month, thanks to a sharp rebound in oil prices over the last couple of weeks.

Also supporting the loonie was the Bank of Canada’s assessment that further rate hikes may be necessary.

The dollar index was steady at 95.17, after losing 0.7 per cent on Wednesday. It has weakened in four out of the last five sessions as traders wager that US interest rates will stay steady in 2019.

The index gained 4.3 per cent in 2018 as the Fed hiked rates four times on the back of a strong domestic economy, falling unemployment and rising wage pressures.

The euro and sterling each gained marginally on the dollar, fetching $1.1547 and $1.2790 respectively. However, traders expect the strength in both these currencies to fade in the coming weeks.

Economic data in the eurozone has remained consistently weaker than forecasts over the last few months, especially in France and Germany, the eurozone’s economic powerhouses. The European Central Bank is widely expected to remain accommodative in 2019, which should keep a lid on the single currency.

Brexit woes are most likely to dominate sentiment towards sterling. British Prime Minister Theresa May must win a vote in parliament to get her Brexit deal approved or risk seeing Britain’s exit from the European Union descend into chaos. The vote is now due to take place on Jan. 15.

May’s chances of winning the vote look slim as the DUP, the small Northern Irish party that usually props up her government, is opposed to the deal.